JD.com's Test of Investor Patience

(Bloomberg Gadfly) -- The e-commerce tussle between China's Alibaba Group Holding Ltd. and JD.com Inc. looks set to enter a new arena, with the latter now eyeing an investment in Indonesia.

JD.com is in talks to inject funds directly into PT Tokopedia, one of the country's largest e-commerce operators, Bloomberg's Yoolim Lee and Selina Wang wrote Tuesday. The Beijing-based firm, backed by Wal-Mart Stores Inc., may invest "hundreds of millions of dollars," which could take Tokopedia's value north of $1 billion. That indicates JD.com might purchase a significant minority stake in Tokopedia, and implies that its interest goes beyond a purely financial one.

By revenue, JD.com is more than double the size of Alibaba. By earnings and market capitalization, though, Alibaba comes top. That's because JD.com gets more than 90 percent of its product revenuegenuine

Should JD.com invest in Tokopedia, it'll be following Alibaba's taking control of Lazada Group SA and its own strategy of building from the ground up. But Tokopedia is a different kind of e-commerce player in that it follows the merchant model used by Alibaba rather than the direct-sales approach employed by JD.com.

This begs the question of what value JD.com can get out of the investment. It's possible the Chinese company will seek ways to integrate operations, cutting overlap in areas ranging from customer service to logistics. A decade ago, JD.com took the decision to build its own delivery systems in China, going as far as deploying drones last year.

In Indonesia, a vast equatorial archipelago of some 17,000 islands, logistics remains a key challenge. Yet the size of JD.com's footprint in Southeast Asia's largest nation is unclear, as is whether it will stick to the well-worn Chinese playbook of keeping a tight control over sales and engaging in delivery all the way to last mile.

Combining operations might also risk JD.com's hard-earned reputation for quality. Yet, if JD.com keeps to its full end-to-end model in Indonesia, investors can expect several more years of slim margins as well as probable losses before any economies of scale are realized.

It's possible a middle ground could be found, with JD.com offering only logistics to Tokopedia and its users, while keeping its own customer service and websites separate.

Such a move would help share the cost of infrastructure and allow JD.com to minimize the risk to its reputation from engaging with third-party merchants. It would still require JD.com to commit to an infrastructure rollout in Indonesia, but traffic from Tokopedia should help cover the costs.

For JD.com shareholders, the risks are reduced, but not eliminated. They've hung on through years of losses and are finally seeing negative operating margins start to shrink. Being told to wait a little longer while JD.com tries to make a go of it in Indonesia may come as a blow.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.